Category: Economics

Hedge fund and tech questions that are rarely asked

COWEN: Given all the data that search companies and some of the other major tech companies have, why aren’t they bundled with hedge funds?

SCHMIDT: What do you mean by bundled?

COWEN: Well, literally in the same company. You’d have a tech company and a hedge fund, and there would be a synergy because the hedge fund would use the data generated by the tech company for investment. So the hedge fund would have that data first. We don’t see that in the market.

And:

COWEN: The major tech companies have done very well, of course, but if we imagine some world in the future where some tech companies are at or near insolvency, and if we think maybe they have a fiduciary responsibility to sell off the information they hold on people, is that a regulatory problem we will need to address?

Obviously, a successful tech company is not going to do that. They would wreck their franchise.

SCHMIDT: Yeah, so the problem that you’re posing is, we have a company that has a great deal of useful information that’s also bankrupt.

COWEN: Right.

Those were my questions to Eric Schmidt.

*Where Economics Went Wrong: Chicago’s Abandonment of Classical Liberalism*

That is the new book by David Colander and Craig Freedman, here is one short bit:

The best way of conveying our conception of what is at least suggestive of a Classical Liberal stance is to present a handful of economists who, in our view, reflect this attitude.  We have chosen six economists: Edward Leamer, Ariel Rubinstein, Alvin Roth, Paul Romer, Amartya Sen, and Dani Rodrik.  Each have, in our view, displayed a Classical Liberal attitude to methodology in important aspects of their work.

I am very much in favor of what the authors propose here, although I might reserve the term classical liberal for the more traditional political distinction.

Why We Can’t Have Nice Things–Elon Musk and the Subways

In New York it costs billions of dollar per mile to build new subways, a price far higher than anywhere else in the world. That’s one reason why Elon Musk’s The Boring Company has been anything but. Even if hyperloop technology doesn’t pan out, Musk’s goal of reducing tunneling costs by a factor of ten is laudable. The Boring Company purchased a tunnel boring machine in April of 2017 and incredibly has already completed a two-mile test-tunnel underneath Hawthorne, LA! Awesome, right? Well, some people just can’t be happy.

“[I]nvaders are coming from underground” proclaims Alana Semuels in a big story in The Atlantic. The title and splash page indicate the theme:

When Elon Musk Tunnels Under Your Home

The billionaire is drilling for futuristic transit under Los Angeles. He didn’t have to ask the neighbors first.

Billionaires are undermining your home. And democracy! Grab your pitchforks! Yet dig a little deeper underneath the lurid headline and the actual complaints are–dare I say it–boring.

I talked to a dozen people who live along the tunnel’s route, and most said they hadn’t witnessed any extra noise or traffic. But none had been informed ahead of time that a private company would be digging a tunnel beneath the street.

But what about all the displaced people?

As the tunnel neared completion, disruptions to the community increased. The company bought another building, this one on the corner of 120th Street and Prairie Avenue, for $2 million, according to public records, to allow for the extraction of tunneling equipment. Adrian Vega had run a cabinet business in that building for 18 years. When his landlord sold the building, the Boring Company came in and offered Vega’s company, Los Vegas Kitchen Cabinets and Doors, extra cash to get out in three months. Vega took the money, and asked for even more time from the Boring Company, which he was granted. But he couldn’t find another space; since moving in August, his business has been closed and his customers don’t know that he’s moved, he told me.

…Shunyaa Turner lives in a small house on 119th Place with his wife and two kids. He said that in the past year, they’ve had to battle more pests, such as raccoons, mice, skunks, and opossums, which they’ve never seen before. He isn’t sure if this is related to the digging; the Hawthorne airport has also been doing more construction as it gets busier, so the animals could have fled from there. He and his wife said they’ve also noticed more cracks in their impeccably maintained walkway.

…The initial document also claimed that the test tunnel would not involve digging under private property, but that, too, has changed—though the company has now bought all the private property it is tunneling underneath. The company has also closed a lane of Jack Northrop Avenue, a street on the other side of SpaceX headquarters

In the author’s own words:

Meanwhile, in Hawthorne, the company that promised its transit test projects would be completely unnoticeable by the community has since uprooted a small business, purchased a house, and closed a lane of traffic indefinitely.

The horror.

The whole framing of the piece is ass-backwards. Semuels is correct that:

[this] would have been unimaginable in a higher-income neighborhood. Indeed, when Musk tried to build another underground tunnel in a wealthier neighborhood in West L.A., residents quickly sued. The project got tied up in court, and [died].

In comparision:

The CEQA allows residents 35 days to push back against granted exemptions…in Hawthorne, the 35-day window passed with little fanfare.

But unfortunately Semuels takes the posh, lawsuit-loving, NIMBY crowd as the appropriate normative standard and any deviations from that as suspect and indicative of the power of billionaires to run roughshod over other people’s rights. Instead, the Boring Company, the Hawthorne city government, and the people of Hawthorne should be applauded for their sensible, forward-thinking, and optimistic approach to new ideas. Bravo to Hawthorne! Hawthorne: Where the future is being made!

I do give Semuels credit, however. She writes honestly so that one can see the real story behind the false frame and she even tips the audience to the correct (Straussian?) reading in her final clever paragraph.

Vega [the owner of the cabinet business who was paid to vacate] has nothing negative to say about the Boring Company—he just blames himself for agreeing to be out so quickly. Nothing like this had ever happened to him before, so he didn’t know what was fair. Nor did he know how hard it would be to set up a new store—the process of getting new city permits, he said, is a lengthy one, and he can’t find a way to cut through the red tape.

Procurement and compliance costs (from the comments)

From my time in both the military and healthcare I can say that the biggest problem are the compliance costs.

For example, I have a phone app that allows me to send texts. We pay very good money to have said app. It does nothing that my phone cannot innately do – except be HIPAA compliant. EMR software is clunky, an active time suck, and adds little or no value … but we are required by law to use it. In each case there are scads of less specific programs out there which are insanely cheaper and more functional, but those programs cannot justify the costs of becoming compliant for a small niche of their business.

In the military we had similar difficulties. If you want systems to be secure, you need to pay extra as the marketplace does not do real security for consumer goods. Likewise, if you worry about logistical tails, building in assured access drastically increases costs.

And I fully suspect that prices will continue to diverge. As ever more of the internet ends up in a giant interconnected mess there will be fewer people able to code in a secure fashion. There will be fewer parts of the ecosystem that can be used by security conscious actors.

Then we get to actual procurement itself. People worry that arcane institutions will somehow make off with lots of money and spend it either poorly or nefariously. Absent easily observed price and cost data in both sectors we began developing rules. These rules drive firms out of the market (e.g. we needed some light interior remodeling to comply with a regulation that specified inches between things, the contractor who has been most affordable and highest quality refused to bid because the hassle on his side was too great). Eventually the rules become too complicated and you start needing specialists to interpret them. Costs skyrocket and firms abuse rules to pad profits. Then the lawyers get involved and things get more expensive. Again, medical and military consumers become a captive market facing greater monopoly as fewer firms can navigate the thicket of rules to even try to make money.

Then we have the problem that people look at these sectors and say that it is public money. All public money should help with goal X (e.g. going “green”, affirmative action, boycotting South Africa/Israel, patriotism, “America first”) and then we become even more overly constrained. Find vendors who meet one hurdle is hard, finding ones that meet 30 is nigh unto impossible unless the vendor is engineering the firm to market solely to this niche – and charging monopoly rates as his reward.

Any single thing would not be too bad for prices, but the marketplace in general is diverging from military and healthcare. Even education is diverging with mandates in FERPA and political business constraints. We have pretty effectively restricted supply, why exactly would we not expect an increase in cost?

That is from “Sure.”

Saving regret

We define saving regret as the wish in hindsight to have saved more earlier in life. We measured saving regret and possible determinants in a survey of a probability sample of those aged 60-79. We investigate two main causes of saving regret: procrastination along with other psychological traits, and the role of shocks, both positive and negative. We find high levels of saving regret but relatively little of the variation is explained by procrastination and psychological factors. Shocks such as unemployment, health and divorce explain much more of the variation. The results have important implications for retirement saving policies.

That is from Axel H. Börsch-Supan, Tabea Bucher-Koenen, Michael D. Hurd, and Susann Rohwedder, in the NBER working paper series.

*Aquinas and the Market: Toward a Humane Economy*

By Mary L. Hirschfeld, here is the opening passage from the Preface:

My rather peculiar intellectual journey began with my pursuit of a Ph.D. in economics at Harvard University, granted in 1989, and culminated in a second Ph.D. in theology, from the University of Notre Dame in 2013.  Economics and theology are two very different sets of discourses, and this book is the result of my effort to sort out the resulting cacophony in my own head.  When I began my career, I would never have imagined writing such a book.  For starters, I was an ordinary somewhat spiritually inclined but definitely not religious type when I began my academic career at Harvard in the fall of 1983.

Definitely recommended, and not just for Ross Douthat.  It is exquisitely written as well.  I enjoyed this sentence in the acknowledgements:

It is because of Tyler that I am a convinced Thomist, though that outcome would undoubtedly horrify him.

I am not easily horrified these days!  Thus there are doubts, always doubts.

Buy the book here.

All Hail Dalton Conley

Conley describes his early academic work as “lefty sociology.” His Ph.D. thesis was on the black-white wealth gap and he dedicated his early career to studying the transmission of health and wealth between parents and children.

At N.Y.U., Conley kept getting into disagreements with geneticists, arguing that their methods were dangerously naïve. It seemed to him implausible that studying only twins — the gold standard of genetics research — was enough to teach us the difference between nature and nurture. But over time, he decided that it wasn’t enough to just argue. Conley is an academic, and even within that tortured group he is something of a masochist. At that time he was a tenured professor, the kind of gig most people see as the endgame of an academic career, and yet he decided to go back and grind out another Ph.D., this time in genetics. He went into his program believing that our social environment is largely the cause of our outcomes, and that biology is usually the dependent variable. By the end of his time, he says, the causal arrow in his mind had pretty much flipped the other way: “I tried to show for a range of outcomes that the genetic models were overstating the impact of genetics because of their crazy assumptions.” He sighs. “But I ended up showing that they’re right.”

From the New York Times piece on Geno-Economics (Tyler linked to it yesterday also).

The new movement of geno-economics

By Jacob Ward at The New York Times.  Do read the whole thing, here is just one small bit:

The geno-economists seem confident that human genes have a measurable influence on human outcomes. But publicizing whatever predictive power does lie in our genes runs the risk of misleading the rest of us into believing that control of our genes is control of our future. They’re adamant that their motives are in forestalling the dystopian implications of the work, in fighting off misinformation and misguided policies. “The world in which we can predict all sorts of things about the future based on saliva samples — personality traits, cognitive abilities, life outcomes — is happening in the next five years,” Benjamin says. “Now is the time to prepare for that.”

Via Garett Jones.

Coasean Skies

Air taxis and delivery drones may soon make the airspace between 200 and 5000 feet above ground level much more valuable. How is this airspace to be regulated? In a very good new paper Brent Skorup draws on Coase, Demsetz, and Ostrom and the law, economics and history of regulated commons to suggest new approaches.

[T]he technological shock—the commercialization of air taxis—will create novel urban airspace scarcity and collective action conflicts. When intended uses conflict, how should airspace be allocated? This is an old problem: the transformation of a common-pool resource in the face of intensive new uses for that resource.

…For traditional aviation, air traffic management is centralized and relies on complex collaboration between airlines, the general aviation industry, air traffic controllers, and regulators. Aircraft routes, payload, slot fees, airport locations, billing, and safe separation between aircraft are all highly regulated components of this interconnected system. Massive economic distortions result from the regulated rationing of airspace and terminal access. Low-altitude airspace (i.e.,200 feet to 5000 feet above ground level) offers a relatively blank slate to explore new models for air transport and to avoid command-and-control mistakes made in the past in aviation.

…Section IV introduces a different idea: that the FAA instead delimit geographic tracts of low-altitude airspace and assign exclusive use licenses to those tracts via auction for a term of years. Flight path, speed, terminal locations, aircraft size, UTM technologies, and pricing choices would largely be delegated to the tract licensees. Finally, Section V explains why this approach, which draws on real-world examples from spectrum auctions and other federal asset markets, may offer more competitive UTMs and dynamic efficiencies for low-altitude air transit. This auction approach also allows aviation regulators to focus less on scientific management of airspace and UTM interoperability and more on aircraft safety, dangerous weather, and inspections.

How much did the housing shock drive political polarization?

From Henry van Straehlen, a job market candidate from Northwestern:

This paper studies the effect of economic conditions on political polarization using micro-data on house prices, mortgages, and individual political contributions. I argue that shocks to housing wealth — the largest asset for most households in the U.S. — lead to political polarization. Using the housing market bust of 2007-2011 as an empirical laboratory, I show that negative shocks to housing wealth increase political polarization. The richness of the data enables me to use individual heterogeneity in housing location and timing of home purchase to disentangle changes in personal wealth from other factors that might be at play in determining political polarization. The effect of housing shocks on polarization is stronger during the crisis, and cannot be attributed to reverse causality or changing neighborhood composition. Survey evidence comparing homeowners and renters shows that only homeowners polarize in response to house price shocks, while renters do not — suggesting that house price shocks are not merely a proxy for other economic shocks. Furthermore, extreme politicians benefit electorally from negative house price shocks to their contributor network, whereas moderate politicians are hurt by negative house price shocks. Financial crises destabilize politics, which then can feed back into the crisis. These results provide insight into the difficulty of adopting structural economic reforms following financial crises.

Work in progress by Henry argues: “I show that when the common ownership between two firms increases through mutual fund acquisition of their stock, the firms converge in political donation behavior and lobbying activity.”

Ho hum, or hidden externalities?

The ratings agency Fitch shrugged on Tuesday at what it considered the “muted impact” on the economies and credit ratings of New York and Washington.

According to Fitch, 25,000 jobs are the equivalent of about a quarter of a percentage point of all the jobs in metro New York. In metro Washington, they’d represent about three-quarters of a percentage point of the labor force. The Washington region is already growing by about 50,000 jobs, or an Amazon HQ2, each year, according to the D.C. Policy Center. New York over the past year gained about 70,000 jobs.

Here is more from Emily Badger at the NYT.

Underargued claims, installment #1437

From Tim Wu, in a recent NYT Op-Ed, he presents a polemic against “monopoly”:

Postwar observers like Senator Harley M. Kilgore of West Virginia argued that the German economic structure, which was dominated by monopolies and cartels, was essential to Hitler’s consolidation of power. Germany at the time, Mr. Kilgore explained, “built up a great series of industrial monopolies in steel, rubber, coal and other materials. The monopolies soon got control of Germany, brought Hitler to power and forced virtually the whole world into war.”

To suggest that any one cause accounted for the rise of fascism goes too far, for the Great Depression, anti-Semitism, the fear of communism and weak political institutions were also to blame. But as writers like Diarmuid Jeffreys and Daniel Crane have detailed, extreme economic concentration does create conditions ripe for dictatorship.

The first ten words are already a give-away, as is the beginning of the second cited paragraph.  For contrast, this is from Thomas Childers, well-known historian of Nazi Germany:

In his biography of Henry Kissinger, historian Niall Ferguson notes that “old man Thyssen” — that is, German steel magnate Fritz Thyssen — “bankrolled Hitler.” Businessmen such as Thyssen using their financial assets to assist the Nazis was “the mechanism by which Hitler was funded to come to power,” according to John Loftus, a former U.S. attorney who prosecuted Nazi war criminals.

But the Nazis were neither “financed” nor “bankrolled” by big corporate donors. During its rise to power, the Nazi Party did receive some money from corporate sources — including Thyssen and, briefly, industrialist Ernst von Borsig — but business leaders mostly remained at arm’s length. After all, Nazi economic policy was slippery: pro-business ideas swathed in socialist language. The party’s program, the Twenty-Five Points, called for the nationalization of corporations and trusts, revenue sharing, and the end of “interest slavery.”

And Wu’s two other cited sources?  Both focus mainly on IG Farben.  Diarmuid Jeffreys is “an award-winning journalist and television producer with thirty years’ experience in the media industry.”  He does have a book on IG Farben and the making of the German war machine, but it does not demonstrate how economic concentration brings totalitarian regimes to power, instead focusing on how IG Farben profited from Nazi war aims and helped build the Holocaust.  Earlier in the 1930s, IG Farben had in fact resisted Nazification. though the company did jump on board once it saw Nazification as inevitable.

Here is the Daniel Crane essay on antitrust and democracy.  Try this excerpt: “… it does not necessarily follow that Farben’s monopolistic position in the German chemical industry is causally related to the rise of fascism—or that monopoly enabled Nazism. Two matters should give us pause before making such an inference.”  Read p.14 to see what follows, but here is one tiny bit: “Though gigantic, Farben remained smaller than three American industrial concerns—General Motors, U.S. Steel, and Standard Oil. Nor was Farben’s wartime market power exceptional.”  On the other side of the ledger, Crane does note that fascistic governments, once in power, find it easier to take over and co-opt more highly concentrated industries, Farben being an example of that.  So there is an argument here, but mainly one data point and also some very serious qualifiers.

Does that all justify the sentence “But as writers like Diarmuid Jeffreys and Daniel Crane have detailed, extreme economic concentration does create conditions ripe for dictatorship.”?  “Ripe” is such a tricky, non-causal word.

I would instead stress that war, civil war, scapegoating, and deflation create the conditions “ripe for dictatorship.”  You might want to toss Russia and China into the regression equation, or how about Cuba and North Korea and Albania and Pol Pot’s Cambodia?  How would the coefficient on industrial concentration end up looking?  I’d like to know.

When big business is the target, and tech in particular, the standards of proof for Op-Eds seem to decline.  Somehow, because we all know that the big tech companies are bad, or jeopardizing democracy, it is OK to make weakly argued claims.

The philosophy and practicality of Emergent Ventures

Let’s start with some possible institutional failures in mainstream philanthropy.  Many foundations have large staffs, and so a proposal must go through several layers of approval before it can receive support or even reach the desk of the final decision-maker.  Too many vetoes are possible, which means relatively conservative, consensus-oriented proposals emerge at the end of the process.  Furthermore, each layer of approval is enmeshed in an agency game, further cementing the conservatism.  It is not usually career-enhancing to advance a risky or controversial proposal to one’s superiors.

There is yet another bias: the high fixed costs of processing any request discriminate against very small proposals, which either are not worthwhile to approve or they are never submitted in the first place.

Finally, foundations often become captured by their staffs.  The leaders become fond of their staffs, try to keep them in the jobs, regard the staff members as a big part of their audience, and adopt the perspectives of their staffs, more so as time passes.  That encourages conservatism all the more, because the foundation leaders do not want their staffs to go away, and so they act to preserve financial and reputational capital.

To restate those biases:

  1. Too much conservatism
  2. Too few very small grants
  3. Too much influence for staff

So how might those biases be remedied?

Why not experiment with only a single layer of no?

Have a single individual say yes or no on each proposal — final word, voila!  Of course that individual can use referees and conferees as he or she sees fit.

The single judge could be an expert in some of the relevant subject areas of the proposals (that is sometimes the case in foundations, but even then the expertise of the foundation evaluators can decay).

This arrangement also can promise donors 100% transmission of their money to recipients, or close to that.  If someone gives $1 million to the fund, the award winners receive the full $1 million.  This is rare in non-profits.  (In the case of Emergent Ventures there are unbudgeted time costs for me and my assistant, who prints out the proposals, and the paper costs of the printing get charged to general operating expenses at Mercatus.  Still, a $1 million grant at the margin leads to $1 million in actual awards.  I am not paid to do this.)

The solo evaluator — if he or she has the right skills of temperament and judgment — can take risks with the proposals, unencumbered by the need to cover fixed costs and keep “the foundation” up and running.  Think of it as a “pop-up foundation,” akin to a pop-up restaurant, and you know who is the chef in the kitchen.  It is analogous to a Singaporean food stall, namely with low fixed costs, small staff, and the chef’s ability to impose his or her own vision on the food.

Once a fixed sum of money is given away, and the mission of the project (beneficial social change) has been furthered, “the foundation” goes away.  No one is laid off.  Rather than crying over a vanquished institutional empire and laid off friends/co-workers, the solo evaluator in fact has a chance to get back to personally profitable work.  It was “lean and mean” all along, except it wasn’t mean.

The risk-taking in grant decisions is consistent with the incentives of the evaluator, consistent with the level of staffing (zero), and consistent with the means of the evaluator.  A solo evaluator, no matter how talented, does not have the resources to make and tie down multiple demands for complex deliverables.  Rather, a solo evaluator is likely to think (or not) — “hmm…there is some potential in this one.”  The wise solo evaluator is likely to look for projects that have real upside through realizing the autonomous visions of their self-starting creators, rather than projects that appear bureaucratically perfect.

And how about the incentives of the solo evaluator?  Well, a fixed amount of time is being given up, so what is the point in making safe, consensus selections with the awards?  The solo evaluator, in addition to pursuing the mission of the fund, will tend to seek out grants that will boost his or her reputation as a finder of talent.  You might worry that an evaluator, even if fully honest will self-deceive somewhat, and use some of these grants to promote his or her own interests.  I would say donate your money to an evaluator who you are happy to see rise in status.

In other words, the basic vision of Emergent Ventures, the incentives, and its means are all pretty consistent.

The solo evaluator also has the power to make very small grants, simply by issuing a decision in their favor at very low fixed cost.  Alchian and Allen theorem!  That helps remedy the bias against small grants in the broader foundation world.

The single evaluator of course is going to make some mistakes, but so do foundations.  And the costs of these evaluator mistakes have to be weighed against the other upsides of this method.

In my view, at least two percent of philanthropy should be run this way, and right now in the foundation world it is about zero percent.  So I am trying to change this at the margin.

How does this idea scale?  What if it worked really well?  How would we do more of it?

Well, it is not practical for this solo evaluator to handle a larger and larger portfolio of grant requests.  Even if he or she were so inclined, that would bring us back to the problems of institutionalized foundations.  The ideal scaling is that other, competing “chefs” set up their own pop-up foundations.  Imagine a philanthropic world where, next year, you could give a million dollars to the Steven Pinker pop-up, to the Jhumpa Lahiri pop-up, to the Jordan Peterson intellectual venture fund, and so on.  Three years later, you would have an entirely different choice, say intellectual venture funds from Ezra Klein, David Brooks, and Skip Gates, among others.  The evaluators either could donate some of their time, as I am doing, or charge a fee for performing this service.  You also could imagine a major foundation carving off a separate section of their activities, and running this experiment on their own, with an evaluator of their choosing.

In a subsequent post, I will discuss how this model relates to the classical age of patronage running through the Renaissance, into the 18th century, and often into the 20th century as well, often through the medium of individual giving.  I also will consider how this relates to classic venture capital and the relevant economics behind “deal flow.”

In the meantime, I am repeating the list of the first cohort of Emergent Ventures winners.  That link also directs you to relevant background if Emergent Ventures is new to you.

Blockchains in Space! Revisited

Last week I titled a post, Blockchains in Space!, as a satirical comment on blockchain mania. Obviously, I forgot the new rule that satire is no longer possible.

SpaceChain’s blockchain node has been launched into space on Oct 25, 2018. In the map below, you can track its movements to see exactly where it is in orbit.

The SpaceChain FAQ also provides a good example of a kind of doublethink that is very common in the blockchain world:

What is the difference between having a blockchain on Earth as opposed to in space?
Blockchain technology is hosted on centralized servers on Earth and are vulnerable to hacking. One way to prevent this issue is to get these platforms on a decentralized network such as SpaceChain’s blockchain-based network of satellites. Blockchain technology in space will be safer from other vulnerabilities such as internet kill switches or governments that are against the technology. In addition, blockchain technology in space will prove as a great use case for supply chains especially since there are certain places on Earth that are outside of coverage zones such as oceans, deserts and forests. These satellites will be able to track, monitor and scan these dead zones.

How do you ensure legal compliance with regulatory bodies in various countries?
We have a legal team to ensure full compliance. We also have team members and partners in China, Israel, Singapore and the US who work with local governing bodies to ensure that we are fully compliant with local regulations.

Ironically, I’m bullish on blockchain (I advise several firms in the space) but it would be nice to see real products with real customers before we start putting blockchains in space.